Texas First-Time Homebuyers Ultimate Guide

Everything To Know About Buying in the Lone Star State

Introduction

Texas holds a lot of appeal for young professionals looking to purchase their first home. The state has a range of world-class cities and charming small towns, a thriving economy, warm weather, no state income tax, and relatively affordable housing options.

Typical home prices across Texas fall close to the national average, which means home values are more within reach than in other, more expensive states. Home prices range substantially from city to city across Texas, with the Austin-Round Rock Metro Area seeing typical home values of $378,454, while Houston has an average home value of $202,538, according to Zillow. Texas currently has fewer homes for sale than there are homebuyers, and homes are going up in value. If this trend continues, you could see a return on your investment if you buy a home in Texas today and decide to sell in the future. Mortgage rates across the country continue to be at historic lows, and Texas is no exception.

If you’re considering buying a home in the Lone Star State, it can help to see an overview of the Texas home-buying process to get an idea of what to expect. Here are the general steps for buying a home in Texas:

  1. Get your finances in order.
  2. Take a homebuyer education course.
  3. Meet with a lender and get pre-approved for a mortgage loan.
  4. Find a real estate agent and consider your home needs.
  5. Begin the home search.
  6. Make an offer.
  7. Have the home inspected.
  8. Apply for the official mortgage loan.
  9. Get homeowners insurance.
  10. Close on the home.

Although everyone’s home-buying journey will differ slightly, this guide can provide a solid overview of how to:

  1. Get approved for a mortgage loan.
  2. Search for your ideal home.
  3. Make an offer.
  4. Close on your new property.

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Chapter 1

How to Start Your Texas Homebuyer Search

There are a few steps you should take to make sure you’re in an ideal position to put an offer on the home of your dreams when you find it.

If you plan to take advantage of a Texas down payment assistance program, you may be required to complete an approved homebuyer education course before closing on your mortgage loan.

Such a course typically costs between $35-$99 and provides a crash course on the home-buying process. You’ll learn:

  • Money management tips
  • The nuances of the mortgage loan approval process
  • How to shop for a home

Here are our favorite homebuyer education courses by city: 

Houston

  • Avenue Community Development Corporation - HUD-Certified First-Time Homebuyer’s Classes: Eight-hour virtual or online courses in which you will review your finances, learn about the home-buying process, and receive an optional counseling session.
  • The Credit Coalition The Fundamentals of Good Credit: Six weekly sessions totaling 15 hours where you will learn about financial management, the credit process, and the home-buying process.
  • Fifth Ward Community Redevelopment Corporation  Online Homebuyers Classes: Eight-hour online and virtual sessions where you will learn about the home-buying process and available assistance programs.

San Antonio

  • Alamo Community Group  Homebuyer Education: A workshop to help you figure out how to search for a home, make an offer, have the home inspected, and close on a home.
  • Neighborhood Housing Services of San Antonio First-Time Homebuyers Class: Eight-hour, HUD-certified course split into two evenings that will help prepare you for buying a home.
  • Framework Online Homebuyer Course: HUD-certified online course that discusses securing a mortgage, working with a real estate agent, placing an offer, and closing on a home.

Dallas

  • Dallas Home Connection Homebuyers Club: Offers educational seminars for first-time homebuyers, as well as credit counseling.
  • East Dallas Community Organization Homebuyer Education Classes: Free courses held every month that discuss the home-buying process.
  • Innercity Community Development Corp. Homebuyer Education: Group classes that discuss budgeting, securing a mortgage loan, credit, and addressing neighborhood issues.

Austin

  • BCL of Texas Homebuyer Education Course: Online course that helps prospective buyers figure out if homeownership is right for them, and learn how to shop for and maintain a home.
  • Framework Online Homebuyer Course: HUD-certified online course that discusses securing a mortgage, working with a real estate agent, placing an offer, and closing on a home.
  • Clearpoint Credit Counseling Solutions Homebuyer Education: Online homebuyer education and counseling that can help prepare you for the mortgage process and home search.

Fort Worth

  • Housing Channel Online Homebuyer Classes: Offers a variety of classes and workshops that can prepare prospective homebuyers for the homebuying process.
  • Clearpoint Credit Counseling Solutions Essentials for Buying a Home: Program to help prepare first-time homebuyers for the home-buying process and fulfill down payment assistance requirements.
  • eHome America Online Homebuyer Course: Online course that discusses money management and the home-buying process. 

El Paso

  • Project Bravo Homebuyer Education Course: Ten-hour, HUD-certified program that discusses mortgage basics, debt repayment, and the importance of saving.
  • Tierra Del Sol Homebuyer Education: Eight-hour course that covers money management, securing a mortgage loan, shopping for a home, and protecting your investment.
  • El Paso Credit Union Affordable Housing Guide to Homeownership Course: Program to help prepare first-time homebuyers for the home-buying process and fulfill down payment assistance requirements.

Aside from gathering the requisite knowledge, you should also make sure you’re in a good financial position to purchase a home right now. Take a look at your current income, savings, credit score, and debt-to-income ratio, and then consider whether you feel confident adding a mortgage to your plate. 

Know Your Credit Score

If you have a low credit score, it could be difficult to secure a mortgage loan. Lenders want to feel confident in your ability to repay the money they lend you, and a credit score is one way they gauge how big of a risk you are. If you’re hoping to get approved for a conventional mortgage loan, you should aim to have a score of 620 or higher, although you can still get approved with a slightly lower score if you put down a larger down payment or agree to a higher interest rate. You could also see whether you qualify for a government-backed mortgage, such as an FHA, USDA, or VA loan, which typically allow for lower credit scores.

If you don’t know what your credit score is, there are a few ways to check it. If you have a credit card, you can likely see an estimate of your score by logging on to your customer account. Otherwise, you can request your credit score once annually from the three major credit agencies:

What information you should have ready:

  • Name
  • Social Security Number
  • Current and previous addresses
  • Date of birth
  • Telephone number

If you’re not in a rush to buy a Texas home and you have a low credit score, you might want to spend some time boosting your score so that you can get the lowest possible interest rate on your mortgage.

Here are a few ways to boost your credit:

  • Set up automatic payments on your credit cards to avoid late payments.
  • Use your credit card for fewer purchases or increase your credit limit.
  • Avoid opening new lines of credit that require a hard credit check.
  • Don’t make any major purchases, such as a new car.

Calculate Your Debt-to-Income Ratio

Your debt-to-income (DTI) ratio is the percentage of your monthly income that goes toward paying off debts. Those debts can include student loans, car payments, minimum credit card payments, and your future monthly mortgage.
 
You can calculate your debt-to-income ratio by adding up all of your monthly debts and dividing that number by your monthly income. For example, if you make $5,000 a month and your monthly debts add up to $2,000, your DTI would be 40 percent. In order to get approval for a conventional loan, you typically need an after-mortgage DTI of 36 percent or less. Government-backed loans tend to be more flexible, with VA loans requiring a DTI of 41 percent or less and FHA loans requiring 43 percent or less.

Although you can certainly purchase a home while carrying debt, you may want to wait until it’s manageable before adding a mortgage to your monthly bills.

Saving Up for Down Payment and Closing Costs

Many prospective homebuyers struggle to save enough money for a down payment, which is typically 3-20 percent of the home’s purchase price. If we use the average Texas home value of $213,036 as an example, a 20 percent down payment would be approximately $43,607, and a 3 percent down payment would be $6,391. People sometimes aim to put down 20 percent in order to avoid paying for private mortgage insurance, but putting down less than 20 percent can be a smart move if that keeps you from draining all of your savings. You ideally want to have some savings left over after the purchase in case any unexpected maintenance issues or personal emergencies arise.

In addition to the down payment, you also need to cover closing costs, which typically cost 2-5 percent of the loan amount. Considering the average Texas home value of $213,036, closing costs could be anywhere from $4,260-$10,651.

Closing costs include things like:

  • Application fee: Cost of processing your loan request and includes a credit check. Costs vary by lender.
  • Loan origination fee: Charge for preparing and evaluating your mortgage loan (typically costs 0.5 percent of the loan amount).
  • Appraisal fee: Cost of having the property appraised to make sure the price is in line with the home’s value. Typically costs $300-400.
  • Property taxes: Typically pay two months’ worth of county and city property taxes at closing.
  • Title fees: Title search and insurance costs for the purpose of ensuring the seller actually owns the property.
  • Home inspection costs: Often required by the lender to make sure the property is structurally sound. Typically costs $300-500.
  • Homeowners insurance: The purchase of homeowners insurance is often required by closing day to ensure the property is covered in case of damage.

To get a better idea of whether you can afford a mortgage right now, plug your information into a mortgage and payment calculator. If you’ve assessed your finances and feel confident that you can afford to buy a home, the next step is to meet with a lender. 

Chapter 2

Getting Pre-Approved for a Mortgage Loan

Perhaps the best way to figure out how much home you can afford is by speaking with a loan officer and getting pre-approved for a mortgage loan.

It’s important to note that there is a difference between prequalification and pre-approval. During the prequalification process, a lender will take a look at your financial information and give you a general idea of how much money they might be able to loan you.

Pre-approval goes a step further and requires a hard credit check and a review of all your financial information by an underwriter. During the pre-approval process, a lender will need to see relevant documents that prove your income, such as:

  • Your W-2s or 1099 forms from the past two years
  • Recent pay stubs
  • Two most recent bank statements
  • Monetary gift letters, if relevant

Basically, any income you report on your taxes will be considered by your lender, but any unreported income will unfortunately not count toward qualifying you for a home loan.

Pre-approval is crucial during the home search because sellers want to know that prospective buyers have the funds on deck to buy their home. A pre-approval letter is all but essential in a competitive real estate market like Texas. Note that a pre-approval is only good for 60-90 days, so you’ll only want to complete this process when you’re ready to actively search for a home. It’s also part of the reason why you shouldn’t engage in activities that will risk your pre-approval, such as quitting your job, making large purchases, or taking out new lines of credit.

Chapter 3

Find a Real Estate Agent and Begin the Home Search

Even though a real estate agent is not required to purchase a home in Texas, it’s always a good idea to hire an experienced agent, if possible, because they will be invaluable during the home-buying process. Plus, the seller typically covers the cost of the buyer’s agent, so it won’t cost you anything to have one.

A trusted real estate agent can help you navigate the sometimes treacherous real estate market, making sure you avoid any pitfalls and going to bat for you during negotiations. If they’ve been working in the area for a while, they should be familiar with the various neighborhoods and be able to give you an idea of how the home values have changed over the past few years. With their guidance, you should be able to avoid purchasing a money pit or being swindled by the seller’s agent.

As you search for a real estate agent, be sure to check online reviews, ask for recommendations from trusted friends and family who have worked with an agent before, and ask your top candidates plenty of questions to determine whether they’re a good fit for you.

Once you’ve hired an agent, give them a clear idea of what you’re looking for in a home. You should write out every detail of your ideal home and divide them into two columns: “Must-Have” and “Nice-to-Have.” No home is likely to check off every one of your boxes, but as long as a home includes all of your must-haves and maybe one or two of your nice-to-haves, it could be the perfect home for you.

Here are some things to consider as you start looking at homes:

  • Price: The homes you look at should, of course, be within your budget, but you should also look at the values of other homes in the neighborhood and determine the appreciation rates to get an idea of whether the home you’re looking at is likely to go up or down in value in the future.
  • Location: Location is important for both the resale value of your home, as well as the quality of life it can offer you. Check to make sure the home is located in a good school district even if you don’t have kids, because that can affect home value. Also, check crime rates in the neighborhood, see how long your commute would be from the property if you work in an office, and find out if there are any parks, shops, or restaurants nearby. If possible, walk around the neighborhoods of homes you’re interested in to get a feel for the area and speak with people who live there to see how they like it.
  • Size: You should determine how much space you need for your current household, with room to spare if you plan to grow your family. Make sure there’s enough common space, as well as outdoor areas if that’s a priority for you.   
  • Type of home: Figure out whether you want a single-family home, a condo, townhouse, or duplex. Different home types have their pros and cons. For example, if you decide to purchase a duplex, you could rent out half of it to help pay for your mortgage.

Your real estate agent will be invaluable during the home search, but you can also do some searching on your own using online tools, such as Zillow, Realtor.com, and Trulia. 

Chapter 4

Make an Offer

Once you’ve found a home you’re interested in purchasing, the next step is to put together an offer with your real estate agent.

Your agent will look at the values of other properties in the area and try to get an idea of how many other offers are on the table as they determine a good offer price. The amount of time the home has been on the market will also factor into how much leverage you have when making an offer. Sellers will likely be more motivated to budge on their asking price if their home has been on the market for a while and they’re anxious to sell. 

If you’re in a position to negotiate, you can include contingencies, such as a home inspection or renovation, or request the inclusion of existing appliances or other amenities. However, in a competitive market like Texas, odds are you will have to work to set your offer apart by waiving contingencies or adding a personal touch like a letter telling the seller why you love the home. In addition to your offer price, terms, and contingencies, your offer will also include a pre-approval letter from your lender to verify that you have the necessary funding on deck. 

Chapter 5

Get a Home Inspection

Once your offer has been accepted, you should hire a licensed home inspector and have them take a thorough look at the property. An inspector will typically check the roof, foundation, structural components, plumbing, HVAC, and electrical system, but you may also want to have the home inspected for termites and radon. You will usually pay the inspector on inspection day, and they will send you a written copy of their report within a few days. If they find major issues with the property, you can rescind your offer on the home. If there are minor issues, your agent can try to renegotiate with the seller to fix the problems or lower the price of the home.

If you’re trying to buy a home in an extremely competitive area, you may need to waive your right to a home inspection, but you should always include a home inspection contingency in your offer if possible. The last thing you want is to move into your new home only to realize there are major issues that are going to cost a lot of money to fix.

Once the home has been inspected, your lender will order an appraisal of the property to make sure the price and home value are aligned. If the appraisal comes back lower than your offer, you may need to ask the seller to lower the price or offer a larger down payment to make up the difference.

Chapter 6

Complete Your Loan Application

Once you have signed the purchase contract, you will complete your official mortgage loan application. Even if you’ve already been pre-approved by a certain lender, know that you can still select a different lender for your mortgage loan. It’s important to work with a lender who will give you both a low interest rate and excellent customer service.

Unless you selected a loan program during the pre-approval process, now is the time to determine which type of mortgage loan is right for you. A traditional, 30-year conventional loan typically requires a 20 percent down payment, but first-time homebuyers can put as little as 3 percent down when they pay private mortgage insurance. In addition to a conventional mortgage, there are also government-backed loans, such as USDA, VA, and FHA loans that have more flexible requirements and allow qualified applicants to put as little as zero to 3.5 percent down. If you need help paying for your down payment or closing costs, there are plenty of assistance programs in Texas you might be able to take advantage of. Here are a few programs to consider:

  • My First Texas Home Loan: A 30-year, fixed rate mortgage for first-time homebuyers that provides down payment and closing cost assistance of up to 5 percent of the mortgage amount in the form of a zero-interest, no-monthly payment lien that only needs to be repaid if the home is sold, refinanced, or paid off.
  • My Choice Texas Home: A 30-year, fixed rate mortgage for repeat buyers that provides down payment and closing cost assistance of up to 5 percent to qualified applicants.
  • Texas mortgage credit certificate: A way to receive a federal income tax break on the interest charges that go to your lender.

Once you’ve submitted your mortgage application, your lender should provide you with an official loan estimate within three days that includes your estimated interest rate, monthly payment, closing costs, and estimated taxes and insurance. After your loan application is processed and approved, your lender will send you a commitment letter, which you can choose to accept and sign.

Chapter 7

Purchase Homeowners Insurance

The purchase of homeowners insurance is typically required by lenders, but it’s crucial to have regardless.

You will want to purchase sufficient insurance so that your home is covered for any possible damage. If the property is located in a flood plain or in the path of hurricanes or other natural disasters, you may need to purchase additional flood or earthquake insurance. For example, anyone purchasing a Texas property located along the Gulf will almost certainly need to make sure their insurance covers wind damage and flooding. 

Chapter 8

Close On Your Home

If you’ve made it to closing day, your new home is within reach. The closing process involves your lender, attorney, and real estate agent, so as long as you trust the people you’re working with, things should go smoothly.

On closing day, you will review and sign your deed of trust or mortgage, the promissory note (agreement to pay the lender), and a closing disclosure (list of final credits and charges). If you have a real estate attorney, have them look over everything and explain anything that isn’t clear to you. And if you haven’t hired an attorney, your real estate agent should be able to explain things to you. 

In addition to reviewing and signing documents, you will likely need to pay your down payment and closing costs, and possibly set up an escrow account to pay property taxes and homeowners insurance on closing day.

The closing documents should specify the official move-in date and instruct you on how to make your monthly payments. Once everything is signed, payments have been made, and the closing is complete, you will receive the keys to your new home and be able to begin the move-in process.

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